‘Rothbard has made at least 10 errors in the space of 5 short paragraphs. The first 4 errors occur in Rothbard’s claim that “Keynes’s Treatise championed the classical a priori theory of probability, where probability fractions are deduced purely by logic and have nothing to do with empirical reality.” First, Keynes’s logical theory of probability is based on George Boole’s 1854 The Laws of Thought. It has nothing to do with the Classical theory of Laplace, whose Principle of Non Sufficient Reason Keynes decimated in the A Treatise on Probability in chapter 4. Second, all of Keynes’s probabilities are conditional. Third, the hypothesis, h, is always related to empirical evidence, e. Thus, a probability is always of the form P(h/e). Fourth, the claim that the “probability fractions are deduced purely by logic and have nothing to do with empirical reality” is simply bizarre as Keynes’s probabilities, in general, are intervals and are not sharp or point probabilities (fractions) except in the limiting case where the weight of the evidence, w, = or approaches 1. The condition that w = 1 or approaches 1 only occurs in the physical and biological sciences. Fifth, the probability relation is not deduced. It is perceived by the decision maker based on intuition, analogy and pattern recognition. …. Eighth, the claim that “… Keynes’s a priori theory was demolished by Richard von Mises (1951) in his 1920s work, ‘Probability, Statistics, and Truth’ is a bad joke. Richard von Mises incorrectly identifies Keynes as a subjectivist and committed the fatal error of overlooking Keynes’s requirement that all probabilities require that w > 0. Richard von Mises claim that Keynes specified probabilities for the case where w = 0 means that he never read the book he claimed to be discussing. Nineth, Rothbard’s claim that “Mises demonstrated that the probability fraction can be meaningfully used only when it embodies an empirically derived law of entities which are homogeneous, random, and indefinitely repeatable” had already been done by Keynes in chapters 8 and 33 of the TP. Keynes would have added the terms uniform and stable as he did in his debate with Tinbergen in 1939–40 in the Economic Journal. Ninth, the claim that “probability theory can only be applied to events which, in human life, are confined to those like the lottery or the roulette wheel” is only correct if one is using mathematical probability. Keynes includes interval probability as the main way in which people use probability. … Rothbard’s scholarship can only be characterized as pathetic.’“Rothbard’s Many Errors about Keynes and Probability,” http://www.amazon.com/gp/richpub/syltguides/fullview/R83TIX8MB95QW

Comments are welcome: I have no hesitation in saying that the finer, technical points of probability theory are not my area.

Friday, November 25, 2011

Steve Keen was interviewed on the BBC’s Hardtalk on 24th November, 2011. The video is below. Skip forward to 2.40 for the beginning of the interview.

Some points:

(1) Technically speaking, many nations are not in depression, but have positive real GDP growth. What is happening is high unemployment, low growth, and economic malaise caused by deleveraging and an over-indebted private sector. This is more akin to Japan’s lost decade (as Keen later says). Serious austerity will cause a relapse into recession or perhaps even depression.

(2) I think Keen is wrong is say that Japan’s lost decade lasted “two decades.” The return to essentially average real GDP growth rates in Japan more or less in line with OECD averages happened from 2002–2003 (although admittedly positive credit growth did not return until 2006), as deleveraging ended (especially by corporations). Without radical action, private deleveraging in the West will probably keep going until 2020 or even beyond that.

(4) To Keen’s list of heterodox economists (from 24.38) add Post Walrasians/coordination Keynesians and (old) American Institutionalists. Keen also gives the Austrians too much credit: the key to the analysis of current problems is Minsky’s Financial Instability Hypothesis (FIH), not Hayek’s nonsense ABCT.

UPDATE
See here for some interesting remarks by Bill Mitchell on Japan’s lost decade:

See the section at the end called “Interesting Graph for Today.”
Bill Mitchell points out that the turn to austerity in Japan in 1996–1997 under Prime Minister Ryutaro Hashimoto caused a severe recession that lasted from June quarter 1997 until the September quarter 1999, prolonging the lost decade.

“Let us now turn to p. 9. The authors make the bizarre claim that Paul Davidson’s Shacklean, Post Keynesian views, that there is only certainty and uncertainty, is a continuation of those parts of the [General Theory] … that represent a true subjectivist position. Unfortunately, Shackle never got past chapter 3 of the [Treatise on Probability] … and rejected Keynes’s entire [Treatise on Probability] … approach in toto. Neither Shackle nor Davidson are followers of Keynes because Keynes totally rejected nihilism and the bizarre Shackle-Davidson claim that there are no degrees/gradations of uncertainty which Keynes spelt out clearly in his 1937 QJE article, titled ‘The General Theory of Employment’. Uncertainty is a range that can be specified in the same identical manner as Keynes’s weight of the evidence index, w. Complete and total uncertainty (ignorance) would have a w = 0. The differing gradations of uncertainty would be between 0 and 1 (0 < w < 1). Complete certainty would have a w = 1. The two authors never specify what their term ‘genuine’ uncertainty is. Their discussions of the beauty contest example (p. 156, GT), which is a continuation of a discussion started by Keynes in his introductory chapter 3 of the [Treatise on Probability] … in 1921 (1908) on the measurement of probabilities, does not fit the bill.”

I have just re-read Keynes’s paper “The General Theory of Employment” (Quarterly Journal of Economics 51 [1937]: 209–223). The crucial passage where Keynes talks about degrees of uncertainty is here:

“By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty; nor is the prospect of a Victory bond being drawn. Or, again, the expectation of life is only slightly uncertain. Even the weather is only moderately uncertain. The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of copper and the rate of interest twenty years hence, or the obsolescence of a new invention, or the position of private wealthowners in the social system in 1970. About these matters there is no scientific basis on which to form any calculable probability whatever” (Keynes 1937: 213–214).

It is indeed possible to see the concept of degrees of uncertainty, and Barkley Rosser describes Keynes’s views on the probability of future events in A Treatise on Probability (1921: 33), and how uncertainty comes in different forms:

“(i) ... there are no probabilities at all (fundamental uncertainty),
(ii) ... there may be some partial ordering of probable events but no cardinal numbers can be placed on them,
(iii) ... there may be numbers but they cannot be discovered for some reason, and
(iv) ... there may be numbers but they are difficult to discover” (Barkley Rosser 2001: 559).

There is also a literature about degrees of uncertainty, some of it by Post Keynesians (Runde 1990; Dow 1995; Crocco 2002; Dequech 1997).

At this point it is notable that Paul Davidson uses the concept of non-ergodicity to reject the view that there are degrees of uncertainty (Crocco 2002: 19). Nevertheless, there are Post Keynesians who recognise degrees of uncertainty, e.g., S. C. Dow (1994: 437). Moreover, here is Jesper Jespersen:

A short interview here with Gerald P. O’Driscoll, the co-author with Mario J. Rizzo of The Economics of Time and Ignorance (2nd edn; Routledge, Oxford, UK., 1996), one of the more interesting books on Austrian economics (for a critique of it from the Post Keynesian perspective, see Davidson 1989 and 1993).

I take issue with O’Driscoll’s analysis, as follows:

(1) O’Driscoll states that “all efforts to stimulate the economy with monetary and/or fiscal policy have failed.” What does he think happened in 2009 when the US rapidly emerged from one of the most severe recession in decades with fiscal stimulus? One can see here how the GDP contraction was reversed by Q3 2009:

Of course, there certainly has been a failure of fiscal policy: it has not been large enough. Current fiscal policy, while insufficient to stimulate the economy back to full employment, is nevertheless keeping the economy on life support, and preventing a severe debt deflationary recession/depression.

(2) It is true that quantitative easing has failed to significantly stimulate aggregate demand. However, that is what any good Keynesian would tell you anyway: monetary policy is a feeble tool for aggregate demand expansion, especially when you are mired in a diseased economy with excessive private debt, barely staving off outright debt deflationary collapse. We currently in a “lost decade,” much like Japan in the 1990s. Japan also gives us a stark lesson in what not to do: in 1996–1997, the Japanese Prime Minister Ryutaro Hashimoto turned to contractionary fiscal policy and austerity, including personal income and national sales tax increases. This plunged Japan back into recession and the lost decade persisted until the early 2000s. That is what the advocates of fiscal austerity would inflict on America and Europe.

(3) O’Driscoll appears to subscribe to the nonsense idea of “crowding out” in current circumstances. This is similar to the absurd New Classical idea of Ricardian equivalence, which I have debunked here.

Wednesday, November 23, 2011

A lecture here from Steve Keen, given at the University of Buenos Aires, explaining amongst other things why neoclassical DSGE models are not capable of properly modeling the macroeconomy, and an outline of the Financial Instability Hypothesis (FIH) of Minsky.

Tuesday, November 22, 2011

Yes, this post is not about economics at all. Instead, I refer people to the peculiar spectacle of the Austrian Robert P. Murphy defending his Christianity against charges of Biblical contradiction over at his blog. His fellow atheist Austrians debate the truth of Christianity in the comments section. While I am not religious at all and consider myself an atheist, one passage cited in the debate really does stand out to me as a severe problem for any anti-state libertarian and Austrian who is also a Christian.

The passage in question is in one of the letters of St Paul (or Paul of Tarsus, or the Apostle Paul). In his letter to the Romans written c. 56 AD, we have Paul urging the Christian community at Rome to be obedient to the state:

“Let every person be subject to the governing authorities; for there is no authority except from God, and those authorities that exist have been instituted by God. Therefore whoever resists authority resists what God has appointed, and those who resist will incur judgement. For rulers are not a terror to good conduct, but to bad. Do you wish to have no fear of the authority? Then do what is good, and you will receive its approval; for it is God’s servant for your good. But if you do what is wrong, you should be afraid, for the authority does not bear the sword in vain! It is the servant of God to execute wrath on the wrongdoer. Therefore one must be subject, not only because of wrath but also because of conscience. For the same reason you also pay taxes, for the authorities are God’s servants, busy with this very thing. Pay to all what is due to them—taxes to whom taxes are due, revenue to whom revenue is due, respect to whom respect is due, honour to whom honour is due.* (Romans 13.1–7).

That is an extraordinary statement of Paul’s view of government, especially since he lived under a pagan Roman government that was increasingly hostile to Christianity. Paul’s admonitions to the Christians of Rome can be summed up with these propositions:

(1) Christians should be subject to their respective governments;

(2) These governments have in fact have been brought about by God’s will: “for there is no authority except from God, and those authorities that exist have been instituted by God.”

(3) Christians should pay taxes.

And this was from St Paul, who claimed to be receiving visions and revelations from God and Jesus (2 Corinthians 12.1-10). I fail to see how this is not a devastating passage which, if seriously taken as the word of God by Christian libertarians, destroys the basis for much of their hostility to government.

In essence, the author cites this definition of inflation by Mises in his treatise The Theory of Money and Credit (1953):

“In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur. Again, Deflation (or Restriction, or Contraction) signifies: a diminution of the quantity of money (in the broader sense) which is not offset by a corresponding diminution of the demand for money (in the broader sense), so that an increase in the objective exchange-value of money must occur. If we so define these concepts, it follows that either inflation or deflation is constantly going on, for a situation in which the objective exchange-value of money did not alter could hardly ever exist for very long. The theoretical value of our definition is not in the least reduced by the fact that we are not able to measure the fluctuations in the objective exchange-value of money, or even by the fact that we are not able to discern them at all except when they are large.” (Mises 2009 [1953]: 240).

The significance of this passage is discussed by Horwitz (2000: 78), who argues that it appears to allow the idea that a fractional reserve banking system could create credit (fiduciary media) in response to demand for it, without, in Mises’s view, causing inflation.

In contrast to this, we have the definition of Murray Rothbard in Man, Economy, and State: A Treatise on Economic Principles (1962):

“The process of issuing pseudo warehouse receipts or, more exactly, the process of issuing money beyond any increase in the stock of specie, may be called inflation. A contraction in the money supply outstanding over any period (aside from a possible net decrease in specie) may be called deflation. Clearly, inflation is the primary event and the primary purpose of monetary intervention. There can be no deflation without an inflation having occurred in some previous period of time. A priori, almost all intervention will be inflationary. For not only must all monetary intervention begin with inflation; the great gain to be derived from inflation comes from the issuer’s putting new money into circulation.” (Rothbard 2004 [1962]: 990).

This definition obviously contradicts that of Mises, and what we have here is another quite clear division within the Austrian school between those who

An interesting interview here with Noam Chomsky. He is correct that the $447 billion jobs package was at least a step in the right direction. However, one could say that

(1) Tax increases are not necessary at the moment for a large stimulus. But to the extent that any tax increase is made highly progressive, the more likely it is that such government deficit spending will lead to increased aggregate demand. Why? The reason is that the taxed income of the extremely wealthy is unlikely to be spent on producible commodities: instead it gets pumped into financial asset markets and primary commodity speculation. Nevertheless, the time for a major tax increase and reform of the tax system is not now, but when the economy has been stimulated back into full employment and the issue of debt deflation has been resolved.

(2) I think that Chomsky is wrong to say that Reagan was “fiscally irresponsible.” On the contrary, fiscal stimulus under Reagan was the right thing to do: the problem was the regressive tax cuts, wasteful military spending, cuts to social spending, and attacks on labour rights. In other words, the main problem with Reagan’s deficits was the composition of government spending, not the government spending per se. Indeed, whatever one thinks of Reagan (I don’t think much of him, frankly), that senile old man was the last president who implemented a Keynesian stimulus with reasonable success, driving down unemployment to comparatively low levels. This is one of those bizarre paradoxes of recent history.

A rather brief little comment here from Steve Keen, but still worth emphasising:

(1) a great deal of the deficits in many nations are just automatic stabilizers: the result of the collapse in tax revenues and rise in unemployment; in this sense, the rise in public debt is just a symptom of the private sector malaise.

(2) the Eurozone is a badly designed neoclassical disaster. We should not be surprised if it breaks up.

Sunday, November 20, 2011

Another interview here with Steve Keen, conducted by the Institute for New Economic Thinking (INET). It is somewhat annoying that it is split up into so many videos. Also, I cannot seem to find Parts 5, 6, and 7, even though it is suppposed to be a 7 part interview. If anyone sees the other videos, let me know.

Rizzo makes a curious comment in his opposition to Obama’s mild stimulus plan:

“The case for infrastructure spending must be made on the value of what is to be built or repaired and the efficiency with which that is done, not on the number of jobs that may be created. Frederic Bastiat made this point in the middle of the nineteenth century.”

This suggests that Rizzo is not completely opposed to the idea of public works spending, despite his criticisms.

It strikes me that two rather well known Austrian economists can be regarded as having endorsed or at least acknowledged the usefulness of fiscal stimulus and public works in a depression: Hayek and Ludwig Lachmann. Here one should always be aware of the diversity in opinion that does characterise the Austrian school, with its different strands.

Lachmann most notably had this to say about Keynesian stimulus during depression:

“Policies based on Keynesian macro-economic recipes might have succeeded (had they then been tried) in 1932 and did succeed in 1940 because it so happened that at the bottom of the Great Depression as well as during the Second World War all sectors of the economy were equally affected. In 1932 any kind of additional spending on whatever kind of goods would have had a favourable effect on incomes because there was unemployment everywhere, as well as idle capital equipment and surplus stocks of raw materials. During the war the situation was exactly the opposite, but precisely for this reason the same recipes, but with opposite sign, applied. With millions of men and women in the armed forces everything, not merely labour, was scarce and any reduction in demand anywhere welcome.” (Lachmann 1973: 50).

Lachmann’s point here is also that Keynesian polices to contract demand, the other side of fiscal stimulus, worked in the Second World War.

Hayek’s limited support for public works in severe downturns can be seen here:

“To return, however, to the specific problem of preventing what I have called the secondary depression caused by the deflation which a crisis is likely to induce. Although it is clear that such a deflation, which does no good and only harm, ought to be prevented, it is not easy to see how this can be done without producing further misdirections of labour. In general it is probably true to say that an equilibrium position will be most effectively approached if consumers’ demand is prevented from falling substantially by providing employment through public works at relatively low wages so that workers will wish to move as soon as they can to other and better paid occupations, and not by directly stimulating particular kinds of investment or similar kinds of public expenditure which will draw labour into jobs they will expect to be permanent but which must cease as the source of the expenditure dries up.” (Hayek 1978: 210–212).

“Even though there are many concerns about organizing public works ad hoc during a depression, everything speaks in favour of having public agencies perform during a depression whatever investment activities need to be carried out in any case and can possibly be postposed until then. It is the timing of these expenses that presents a problem, since funds are often extremely hard to raise in the midst of a severe depression and the accumulation of reserves in good times generally faces the objections mentioned above. There is little question that in times of general unemployment the state must intervene to mitigate genuine hardship either by disbursing unemployment compensation or, as in earlier times, by legislation to help the poor.” (Hayek 1999 [1937]: 184).

Saturday, November 19, 2011

However, this gives an insight into the mentality of Ludwig von Mises, and the differences between Mises’s brand of Austrian Classical liberalism and Chicago school free market economics. We might also note Friedman’s very dim view of the Austrian business cycle theory:

“... I think the Austrian business-cycle theory has done the world a great deal of harm. If you go back to the 1930s, which is a key point, here you had the Austrians sitting in London, Hayek and Lionel Robbins, and saying you just have to let the bottom drop out of the world. You’ve just got to let it cure itself. You can’t do anything about it. You will only make it worse. You have Rothbard saying it was a great mistake not to let the whole banking system collapse. I think by encouraging that kind of do-nothing policy both in Britain and the United States, they did harm.” “Milton Friedman on ABCT,” June 24, 2011.

Certainly, in terms of his influence on contemporary neoclassical policy-makers in Europe and America, Hayek’s influence is in fact grossly overrated. Today’s debates are between New Keynesians and advocates of the New Consensus macroeconomics, with the more strident New Classicals and monetarists having the most poisonous and pernicious influence. All of these economists are neoclassicals, however, and the free market New Classicals and monetarists are not Austrians.

Friday, November 18, 2011

It is obviously true that money and other assets are not just “produced” by business hiring workers in response to increases in demand for them. A surge in demand for financial assets on secondary markets does not lead to unemployment falling in a recession as financial assets are “produced,” in the way that cars, TVs or DVD players are.

In a country with no or minimal gold/silver production, such output will not increase in response to an increase in liquidity preference. Even in countries where gold is mined the effect on employment is trivial.

Under the gold standard, when money was a producible commodity, significant production was limited to certain countries and brief times. E.g., if the UK was hit by a deflationary depression in the 1880s, with a rising purchasing power for money as demand for it increased as a hedge against future uncertainty (that is, a rise in its value due to deflation), can UK businesses just hire unemployed workers to “produce” gold in the UK? Of course not.

As Keynes said:

“… money has, both in the long and the short period, a zero, or at any rate a very small, elasticity of production, so far as the power of private enterprise is concerned, as distinct from the monetary authority;—elasticity of production meaning, in this context, the response of the quantity of labour applied to producing it to a rise in the quantity of labour which a unit of it will command. Money, that is to say, cannot be readily produced;—labour cannot be turned on at will by entrepreneurs to produce money in increasing quantities as its price rises in terms of the wage-unit. In the case of an inconvertible managed currency this condition is strictly satisfied. But in the case of a gold-standard currency it is also approximately so, in the sense that the maximum proportional addition to the quantity of labour which can be thus employed is very small, except indeed in a country of which gold-mining is the major industry.

Now, in the case of assets having an elasticity of production, the reason why we assumed their own-rate of interest to decline was because we assumed the stock of them to increase as the result of a higher rate of output. In the case of money, however—postponing, for the moment, our consideration of the effects of reducing the wage-unit or of a deliberate increase in its supply by the monetary authority—the supply is fixed. Thus the characteristic that money cannot be readily produced by labour gives at once some prima facie presumption for the view that its own-rate of interest will be relatively reluctant to fall; whereas if money could be grown like a crop or manufactured like a motor-car, depressions would be avoided or mitigated because, if the price of other assets was tending to fall in terms of money, more labour would be diverted into the production of money;—as we see to be the case in gold-mining countries, though for the world as a whole the maximum diversion in this way is almost negligible” (Keynes 1936: 230–231).

Thursday, November 17, 2011

Daniel Kuehn has written an insightful and thought-provoking comment on the Austrian Business Cycle Theory (ABCT) here, which I reproduce below:

“For what it’s worth, I think Hayek has a more useful set of ideas on the business cycle than Mises anyway. Keynes even made basically the point in Ch. 16 of the [General Theory] that Hayek does in Prices and Production – that a lower interest rate will make production processes longer (and also more capital intensive – but the elongation is the main point). Hayek’s business cycle theory hinges on the fixed [and specific] nature of those investments in longer production processes. That guarantees that adjustment is not costless. I’m not that familiar with Mises, but I don’t think he has that mechanism that Hayek does.

My concern with all the Austrian work is that while it may be a very interesting description of what happens to what they call the ‘time structure of production’ in response to the interest rate, there’s no obvious reason to tie that to the business cycle. Their story is ‘during the boom interest rates are artificially low, and during the bust they go back to their natural rate’. In a loanable funds world, that makes sense. But in a liquidity preference world, the story is ‘interest rates are too high for full employment’. In a liquidity preference world where those interest rates are kept too high by a zero lower bound, you of course have even more trouble.

So the whole Hayekian story is predicated on the assumption that we move below Wicksell’s natural rate during the boom, and return to it in the bust. Our best understanding of macroeconomics (from Hicks et al.) says that we’re at Wicksell’s natural rate during periods of full employment, and are above it during the bust.

In other words, the Hayekian mechanism should produce a capital structure that is just right during the boom and too short during the bust – exactly the opposite of their normal story.

“Their story is ‘during the boom interest rates are artificially low, and during the bust they go back to their natural rate’. In a loanable funds world, that makes sense.”

It is better to say: if the natural rate of interest actually existed and loans were made in natura.

(2) This reminds me of Nicholas Kaldor’s different critique of Hayek’s ABCT. In 1942, Kaldor published “Professor Hayek and the Concertina-Effect” (Economica n.s. 9.36 (1942): 359–382), which was an attack on Hayek’s new version of his trade cycle theory in Profits, Interest and Investment (London, 1939). Kaldor focussed on Hayek’s Ricardo effect (or what Kaldor preferred to call the “Concertina-Effect,” since Ricardo had the examined the relative prices of labour and capital), and argued that in fact Hayek’s postulated mechanism to explain a decrease in capital goods investment when an increase in demand for consumer goods occurred during a period of full employment was not credible (for a short analysis, see Kyun 1988: 37–38 and Kaldor 1996: 156–157). Hayek argued that rising demand for consumer goods during full employment raises the prices of consumer goods and reduces real wages. Capitalists increase investment, but use less “capitalistic methods of production” (Kyun 1988: 37) by more labour intensive methods and less capital goods. The decrease in investment in capital goods overwhelms the use of labour and an overall decrease in investment results. Kaldor debunked this “Concertina Effect,” arguing instead that an increase in consumer goods demand increases overall investment.

This an interview with the historian and political economist Robert Skidelsky originally in aired January 2007. Skidelsky discusses Keynes and his biography of Keynes, a work I admire very much (in fact, I always keep that three volume work of Skidelsky close at hand on my desk, for reference). This interview was after the publication of the third volume of this biography:

(1) From 2.15, Skidelsky makes the very important point that governments around the world first started to adopt Keynesian economic principles during the Second World War, and they did so to control inflation and excessive aggregate demand, by eventually contracting demand when wartime command economies had been implemented (a point once made in a similar way by the Austrian economist Ludwig Lachmann which I have discussed here). This is something that is forgotten by many people: Keynesianism is not just about stimulating the economy during times of recession or depression; the important other side of Keynesian demand management is to stop inflationary outbreaks during boom times by reducing the level of aggregate demand.

(2) The nations that used fiscal stimulus on a large scale in the 1930s to end the depression or high unemployment and low growth (what Keynes called an unemployment equilibrium) after the depression were New Zealand, Japan and Germany, as I have discussed here:

The US used moderate fiscal stimulus in the 1930s and the effects were (as you would expect) moderate, rather than the highly successful results seen in, say, New Zealand, with a higher level of stimulus. Sweden in the 1930s also used mild to moderate fiscal stimulus, although its recovery was also helped by abandoning the gold standard, monetary and banking stabilisation, and export-led growth.

(3) I am not convinced by Skidelsky’s explanation of stagflation (from 19.22). My analysis of stagflation is here:

(4) The analysis of US economic policy under Bush is flawed (from 20.09). While fiscal stimulus was certainly used after 2001, the bubble economy of the Bush years was not what is desired by Post Keynesians. Poorly regulated financial markets and aggregate demand pumped up by debt-fuelled asset bubbles constitute what was essentially pre-Keynesian economics.

Wednesday, November 16, 2011

An interesting talk here by Marshall Auerback (from the Levy Economics Institute), the proponent of modern monetary theory (MMT). As Auerback says, the fundamental problem with the Eurozone is the lack of a union-wide fiscal policy, and the fact that member nations have given up their monetary independence.

Hayek even thought that political considerations justified government interventions to prevent the type of deflationary depression in Weimar Germany in 1932–1933. Galbraith makes the point that Keynes’s economics is still very much relevant for today.

II. Edmund Phelps’s Opening Remarks

Edmund Phelps defends the monetary interventions of the Fed in 2008–2009. Frankly, I don’t see much in Phelps’s subsequent remarks criticising Keynesianism derived from Hayek. Instead, Phelps just worries about excessive public debt and the effectiveness of stimulus.

III. John Cassidy’s Remarks

Cassidy tips his hat to Hayek over the socialist calculation debate, but goes on to dismiss Hayek’s other economic theories. Cassidy mentions the Austrian business cycle theory, which is Hayek’s major economic contribution, and dismisses it, though not with a proper critique. For critiques of the Austrian business cycle theory, see my posts here:

Steve Moore claims that Keynesianism hasn’t worked, defending that by merely pointing to the fact that the US stimulus has not reduced unemployment significantly and created a great boom. That shows simple ignorance of the level of stimulus needed to do this, and of course the current problem of debt deflation and the issue of balance sheet recessions. Moore then makes the ridiculous claim that Reaganomics was the opposite of Keynesianism: the truth is that Reaganomics was nothing but a conservative version of Keynesianism.

V. John Cassidy’s Refutation

Cassidy points out that Obama’s stimulus was only about $780 billion, not large relative to the size of the US economy. He also refutes Moore’s claim that Reaganomics was not Keynesianism.

VI. Sylvia Nasar’s Remarks

Sylvia Nasar remarks were the most interesting in the whole debate. Nasar challenges the view that Hayek predicted the 1929 crash. She cites a German biographer of Hayek (does anyone know who this is?) who looked over Hayek’s “monthly forecasts” issued in Austria in 1929. In April 1929, Hayek’s forecasts hinted at the “unpleasant consequences” because of credit growth. In October 1929, however, Hayek wrote something very different in the newsletter, as follows:

“there is no reason to expect a sudden breakdown of the New York stock exchange.” [He added:] “A pronounced crisis need not be feared.”

If true, this is a savage blow against the “predictive” power of Hayek. It bears further investigation.

Nasar also states that Hayek was opposed to interest rate cuts in the early 1930s.

VII. Diana Furchtgott-Roth’s Remarks

Diana Furchtgott-Roth shows utter ignorance when she points to the size of the deficit as a percentage of GDP, in her claims that these high deficits somehow show that Keynesianism doesn’t work. The fact is that a government can be running a deficit and actually be engaging in contractionary fiscal policy. For example, Ireland has also been running large deficits as a percentage of GDP for some years, one of the largest in the Eurozone, but it was not practising Keynesian stimulus. Why? The reason is that Keynesian stimulus requires increases in discretionary spending to offset the contraction in private consumption and investment spending and spending by foreigners on a nation’s exports. Ireland and other nations have deficits because their tax revenues severely collapsed. They have in fact cut government spending. That is not Keynesian stimulus. This is the reverse: contractionary fiscal policy. The US also has a large deficit as a percentage of GDP because its tax revenue has collapsed, not because the government engaged in massive increases in discretionary spending.

VIII. Steve Rattner’s Remarks

Rattner reviews the auto rescue program, and then the financial sector. Rattner makes a mistake in defending the crony capitalist bailout of the financial sector, in my view.

IX. Lawrence White’s Remarks

White drags up the moribund Austrian business cycle theory. He states that Keynesians have no theory of the boom or bust; that is nonsense. He utterly ignores Minsky’s financial instability hypothesis. Lawrence White refers to Hayek’s Prices and Production, and claims that Hayek there wanted to maintain nominal spending. I see no such evidence of this. Hayek supported monetary stabilisation and limited fiscal policy later in life, but not in Prices and Production.

For a short introduction to the Chicago School, see here (and for the Austrian school see here). A peculiar exception to the general free market temper of the interwar Chicago school was the market socialist Oskar Lange, who became a professor in 1938.

Jerry O’Driscoll makes the fascinating point that some viewed the interwar Chicago school as “leftwing” and some members of it were “‘Keynesian’ on fiscal policy before Keynes.” This should be related to Milton Friedman’s own description of the differences between the views of the London School of Economics (as influenced by Hayek) and the Chicago school on the depression of the 1930s:

“Lerner had been trained at the London School of Economics where the dominant view was that the depression was an inevitable result of the proceeding boom; that it was deepened by the attempts to prevent prices and wages from falling and firms from going bankrupt; that the monetary authorities had brought on the depression by inflationary policies before the crash and had prolonged it .... The intellectual climate at Chicago had been wholly different from that at the LSE. My teachers regarded the depression as largely the product of misguided government policy. They blamed the monetary and fiscal authorities for permitting banks to fail and the quantity of deposits to decline. Far from preaching the necessity of letting deflation and bankruptcy run their course, they issued repeated calls for government action to stem the deflation. There was nothing in these views to repel a student, or to make Keynes attractive. On the contrary, so far as policy was concerned, Keynes had nothing to offer those of us who had sat at the feet of Simons, Mints, Knight, and Viner.” (Friedman as quoted in Skidelsky 1992: 379).

Skidelsky also notes that Jacob Viner’s review of Keynes’s General Theory was on the whole constructive (more so than that of Frank Knight), even if differences remained (Skidelsky 1992: 378).